To Really Move the Needle, You Must Move the Financial Needle First
Today’s supply chain management and manufacturing executives live in a finance-driven world, managing profit and loss sheets, dealing with working capital issues, and collaborating with CFOs. Furthermore, the ultimate measurement of a company’s performance is often the stock price or valuation, which is why you should start every day with the same mindset and look at your business’s financials.
When you examine financials, you should always have your specific goals in mind. The market is bursting with tools that promise to increase throughput, boost sales, and solve all kinds of issues, but it’s vital to focus on your own goals and objectives. What problem do you want to solve? How can your data help reorient the material flow to free up cash without jeopardizing the business?
Ultimately, most executives have three priorities: making more sales, managing variable costs to improve margins, and keeping customers happy. When I look at financial reports, I’m really interested in seeing the inventory and the cash flow statements, because the health of supply chain and manufacturing operations is often reflected in the cash positions and inventory of a company.
Measuring Financial Health in the Supply Chain
Instead of getting straight to the nitty-gritty and doing defect analysis on every production line in every factory, it’s critical to understand where the constraints are from a demand perspective. Look at historical data to determine best-case scenario demand and worst-case scenario demand, and apply data from the end-to-end supply chain to start mapping demand and identifying capacity constraints.
The farther upstream bottlenecks are, the more value they’ll create naturally because there’s always a bullwhip effect. By eliminating them, you can either sell more products or capture more market share.
If you want to increase your bottom line, that’s the process to use. Look at financials first to map out the value chain and see where inventory is most concentrated. Then, identify opportunities to free up cash and address immediate bottlenecks by investing in capital expenditures or reorienting the material flow. Both are quicker options than, say, getting injection molding machines installed on the production floor.
Supply chain management is a delicate balance of financial and operational processes, and business growth requires the right perspective. To move the needle at your organization, prioritize these strategies:
1. Remember that cost optimization doesn’t cause growth.
Anyone with a college degree can come in and cut costs. It’s not difficult, and engineers are constantly focused on making technologies that are cheaper and faster. The issue is that a lot of the people who generated growth before the cost-cutters arrived made a deliberate effort to create excess capacity that can support a certain environment.
Everything’s about pennies and dimes these days, but instead of trying to be as cost-centric and effective as possible, a growth mindset requires you to focus on what’s selling and find out how to make your supply chain faster. The more orders you can fulfill, the more money you can earn. If you want to grow, you can’t start by cutting costs. Instead, figure out what’s selling and reorient material flow to turn that product over faster and build up your cash reserves.
2. Step back and measure your efforts.
Supply chain and manufacturing executives are incredibly busy with day-to-day operations. However, it’s important to take a step back, look at your performance data for the last three to four years, and see if the effort you’re putting in is actually leading to sales.
We live in a world where IT is integral to everything, including connecting downstream sales data with operations. This data can help generate forecasts, mitigate risk, and even produce crisis management plans for all the different scenarios that could play out. When you can look at performance data on a global scale, it can build resilience, reduce the waste in your supply chain in the form of buffers, and ultimately preserve your cash flow for growth.
3. Work more closely with the C-suite.
Don’t position yourself as a cost-centric value add. Today’s procurement and supply chain executives are all about getting the best deal, but that doesn’t really matter. It’s great if you can get the best deal, but it’s far more important if you can get customers buying more and logistics providers and suppliers moving the next products into place with the fastest turnaround times.
Executives in supply chain and manufacturing need to have the ear of the CEO and CFO and have an idea of all the levers in the business. With a holistic, end-to-end view, supply chain manufacturing executives can come up with operational improvements and confidently tell sales, “This is what we can realistically make.”
Supply chain and manufacturing executives need to quit the penny-pinching and recognize that cost-cutting measures can’t achieve the groundbreaking growth they want. Once supply chains are accelerated and product is moving off the shelves, you can start looking at the challenges that emerge on a global scale and identify different resources that could help overcome those challenges and demonstrate proven ROI.
Ali Hasan R. is co-founder and CEO of ThroughPut Inc., the AI supply chain pioneer enabling companies to detect, prioritize, and alleviate dynamic operational bottlenecks. Ali has unique experience in onshore and offshore supply chain management in the U.S., Russia, United Arab Emirates, Saudi Arabia, Pakistan, Bahrain, and Yemen.
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